July 11 (Bloomberg) -- Chubb Corp., which mocked rivals for
receiving federal aid during the 2007-2009 financial crisis, is
leading the largest publicly traded U.S. insurance firms by
producing the highest risk-adjusted return.

Chubb climbed 1.52 percent in the five years through
yesterday after adjusting for price swings, beating every stock
in the 22-company Standard & Poor’s 500 Insurance Index,
including Warren Buffett’s Berkshire Hathaway Inc., according to
the BLOOMBERG RISKLESS RETURN RANKING. Fellow non-life insurers
Travelers Cos. and Ace Ltd. came in second and fourth, with
gains of 0.92 percent and 0.75 percent, respectively. Aon Plc, a
London-based broker, was third.

Property-casualty carriers tend to take less risk investing
than other insurers because they need to have liquidity to pay
claims after large-scale disasters. That strategy helped them
sidestep investments in mortgage securities that hobbled
American International Group Inc. during the housing crash.
Investment gains have bolstered the shares, while increasing
rates for commercial coverage may improve margins.

“Slow, steady and consistent in the insurance industry is
held at a premium,” Paul Newsome, an analyst at Sandler O’Neill
& Partners LP, said in a phone interview. Chubb, Travelers and
Ace “avoided a lot of the turmoil that hurt companies during
the financial crisis” and “appear to be out front of most
other companies in raising rates,” he said.

Commercial insurance rates rose 4 percent in June on an
annual basis, extending gains that began last year, according to
MarketScout data compiled by Bloomberg.

Mocking AIG

Travelers and Warren, New Jersey-based Chubb both increased
prices by 8 percent in the first quarter at their units that
sell coverage to U.S. businesses. Zurich-based Ace raised rates
3.6 percent in the U.S. in the period. Mark Greenberg, a
spokesman for Chubb, New York-based Travelers’ Shane Boyd and
Ace’s Stephen Wasdick declined to comment.

Chubb produced the highest total return over the five
years, gaining 54 percent, and had the fourth-lowest volatility.
The company remained profitable throughout the financial crisis
as AIG posted losses and received a U.S. government bailout that
left it majority-owned by the Treasury Department. Selena
Morris, an AIG spokeswoman, declined to comment.

“If consumers are unlikely to buy a car built by the
government, why on earth would they want to buy an insurance
policy underwritten and adjusted by folks who act more like
bureaucrats than business people?” Chubb’s then Chief Operating
Officer John Degnan said in 2009. “We will compete vigorously
against companies which are unsustainable but for government
bailouts.”

Worst Performer

AIG, based in New York, was the worst performer in the
Bloomberg ranking, declining 97 percent in the five-year period,
and suffering the second-highest volatility. Hartford Financial
Services Group Inc., which also received bailout funds, was the
second-worst performer on a risk-adjusted basis. The insurer
repaid the U.S. government in 2010.

The risk-adjusted return, which isn’t annualized, is
calculated by dividing total return by volatility, or the degree
of daily price variation, giving a measure of income per unit of
risk. A higher volatility means the price of an asset can swing
dramatically in a short period, increasing the potential for
unexpected losses.

Chubb, Ace and Travelers mainly invest in high-grade
corporate and municipal bonds that have rallied in recent years
as interest rates fell, said Mark Dwelle, an analyst at RBC
Capital Markets. Less than 2 percent of Chubb’s fixed-income
portfolio was below investment grade at the end of last year,
compared with 3.1 percent for Travelers and 12 percent for Ace,
according to regulatory filings.

‘Preserving Capital’

“None of them have been known to reach for yield,” Dwelle
said in a phone interview. “They’re very focused on matching
their durations and preserving capital.”

That investing approach may present a challenge going
forward because their balance sheets could contract very quickly
if interest rates rise and inflation picks up, Josh Shanker, an
analyst at Deutsche Bank AG in New York, said in a phone
interview.

Buffett has said bonds are among the “most dangerous”
assets because their returns are eroded by inflation and current
low interest rates don’t pay investors for the risk they take.
Ten-year Treasury yields fell below 1.5 percent for the first
time on June 1.

Berkshire, which holds more of its investments in stocks
than fixed-income securities, had a risk-adjusted return of 0.4
percent for the five years, the seventh-highest in the S&P
insurance index. The company benefited from the second-lowest
volatility among the 22 stocks.

Paulson’s Push

“As long as investors are scared, ultimately Ace, Chubb
and Travelers will outperform other financials,” Shanker said.
“A rally is not your friend in owning these stocks.”

Life insurers such as MetLife Inc., as well as AIG and
Hartford, which sell both life products and property-casualty
coverage, have faced pressure from falling interest rates, which
make it harder for them to earn a spread on retirement products
with guaranteed rates of returns for customers.

MetLife CEO Steven Kandarian said in May that investors are
worried about the life insurer because its cost of capital is
higher than its return on equity. His firm had the seventh-worst
performance in the index during the past five years on a risk-adjusted basis.

Hartford’s largest shareholder, the hedge fund run by
billionaire John Paulson, this year pushed for the insurer to
sell its life operations and focus on its more profitable
property-casualty business. The company is seeking buyers for
several units, including its individual life and retirement-plan
operations.

Stock Repurchases

The plan to divest some businesses will boost shareholder
value, Shannon Lapierre, a Hartford spokeswoman, said in an e-mail. The insurer’s stock price “reflects the challenges to the
global economy and low interest rates,” she said.

Chubb had the strongest performance in the insurance index
because its underwriting results have been better than peers and
it aggressively repurchased stock, said Sandler O’Neill’s
Newsome. The insurer has cut the number of shares outstanding by
about 30 percent during the past five years, according to
regulatory filings.

Travelers, which repurchased about 40 percent of its shares
in the past half-decade, faced more underwriting losses than its
rival, Newsome said. Tornadoes in the U.S. last year cost the
insurer more than Hurricane Katrina, the most costly natural
disaster for the industry. Ace hasn’t bought back much of its
stock during the period, Newsome said.

Rate Increases

Travelers had the second-highest total return in the
ranking, gaining 36 percent, and Ace was third with a total
return of 30 percent. The two companies had the sixth- and
seventh-lowest volatility.

Michael Nannizzi, an analyst for Goldman Sachs Group Inc.,
said in a June 12 note to clients that rising prices for
property and casualty coverage are an “important investable
theme” for money managers looking at the industry.

“If the pricing cycle wasn’t going the right way, there’d
be only a modest amount of interest among investors in these
stocks,” said John Roscoe, a portfolio manager who helps
oversee about $4.5 billion at New York-based Roosevelt
Investments, including shares of Chubb.

The industrywide price increases will probably stick
because they’re not too large, said Jonathan Adams, an insurance
analyst for Bloomberg Industries. Past periods of rising prices
have been steeper and were followed by rate reductions as
carriers competed for business, he said.

“These price increases are, by and large, sustainable,”
Adams said in a phone interview. “It’ll certainly help them
down the road,” by improving their margins, he said.